Money laundering in SA: not only a street crime, also in the boardroom

Money laundering in South Africa shows that the battle against crime in the country is not only fought in the streets but also in the boardrooms, in online meetings and in banks and companies all over the country.

Hawken McEwan, director for risk and compliance at DocFox, says as the country’s crime rates surge, so does the urgency for criminals to “clean” their ill-gotten gains. “The hard truth? Your business might unwittingly be their laundromat,” he warns.

Recent South African crime statistics paint a grim picture. Kidnapping cases have skyrocketed by 183% over nine years, with 10 826 cases recorded in 2021/2022. Drug-related crimes and illegal firearm possession have surged by over 15%, while cash-in-transit heists and truck hijackings continue to plague our communities.

McEwan says these are not just numbers, but a stark reminder of the criminal undercurrent threatening our society. “What many do not realise: these crimes are just the beginning. What follows is often an elaborate dance to disguise the proceeds, a process we call money laundering.

“It is not about facilitating the initial crime, but about making the profits appear legitimate afterwards. Money laundering, while often perceived as a victimless crime, is intrinsically linked to the criminal activities that endanger not only the economy but also the lives of the citizens and wildlife of South Africa.”

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How money laundering happens after a major heist

McEwan says, for example, a criminal gang pulls off a major heist. “They now have millions in cash, but they cannot exactly walk into a dealership and buy a fleet of luxury cars without raising eyebrows. This is where money laundering comes in  — a three-step waltz of placement, layering and integration.”

First, he says, they might deposit small amounts in various bank accounts or mix it with legitimate business income. “Then they move these funds around, splitting and recombining them, perhaps converting them into different currencies or buying and reselling goods. Finally, the now “clean” money re-enters the economy as seemingly legitimate funds.”

It is important to understand that criminals do not just use banks to launder money, McEwan points out. “They exploit businesses, particularly those in high-risk sectors such as financial service providers, estate agents, attorneys and vendors dealing in high-value goods.

“For instance, individuals might insist on paying for a high-value item, such as a vehicle or a diamond ring, in cash, often in one large lump sum or smaller fractionated amounts to conceal the large cash payment.”

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Perpetrators use professional industries for money laundering

In addition, he says, perpetrators often use the professional status of certain industries to make their illicit business, financial, or property transactions appear legitimate. “They may target financial institutions and legal services to legitimise their transactions. Law firms, in particular, are seen as attractive targets due to their involvement in large financial transactions and the potential misuse of trust accounts for illicit purposes.

“They might approach attorneys to assist with creating companies and trusts and perhaps estate agents and conveyancers as well to facilitate property purchases and sales, all to obscure the true source of funds.”

McEwan says the scale and sophistication of money laundering is staggering. “It is not just criminal money. It is a cancer eating away at our economy, distorting markets, funding criminal syndicates and undermining legitimate businesses.”

He says what is even more alarming is how sophisticated these operations have become. “Gone are the days of simple cash businesses as the only front for money laundering. Today, criminals exploit everything from real estate and luxury goods to complex corporate structures and digital currencies. They are adept at finding the cracks in our financial system and widening them for their benefit.”

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Know Your Customer protocols

Therefore, he points out, Know Your Customer (KYC) protocols are more important than ever. “It is not just about ticking boxes or complying with regulations. It is about protecting your business from becoming an unwitting accomplice to crime. Every time you onboard a new client or process a large transaction without proper due diligence, you may open the door to illicit funds.”

The consequences of being involved, even unknowingly, in money laundering can be severe. McEwan warns that beyond the legal ramifications and potential fines, there is a devastating blow to your reputation as a company. “In an age where trust is currency, can your business afford to be associated with criminal activities?”

However, he says there is a silver lining and that is that businesses are not powerless in this fight. “By implementing robust KYC procedures and staying vigilant, businesses can become the first line of defence against money laundering or at the very least make it harder for criminals to gain from their illegal activities.

“It is about asking the right questions, verifying information and being alert to red flags like unusual transaction patterns or overly complex ownership structures.”

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Businesses should watch out for these red flags

What are these red flags? McEwan says while the methods criminals use can vary, common indicators include large cash transactions or payments by unknown third parties, which are often a sign of illicit funds being introduced into the financial system.

“Unusual interest in verification processes or a reluctance to provide necessary information can also be telling. Transactions involving inflated or deflated invoices may signal attempts to launder money through commercial deals.

“The purchase of high-value goods or financial products with subsequent requests for refunds or rapid resale might suggest that the primary goal is to launder money rather than conduct legitimate business.”

He says technology is an ally in this battle as advanced KYC solutions can help streamline the verification process, making it easier to conduct thorough checks without bogging down operations. These tools can cross-reference data, flag potential risks and help to build a clearer picture of who a company is really doing business with.

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‘When’, not ‘if’ your business will encounter money laundering

“As South African businesses, we can no longer afford to be naïve. The prevalence of crime in our country means that the risk of encountering money laundering attempts is a matter of ‘when’, not ‘if’. It is time to shift our mindset from seeing KYC as a bureaucratic hurdle to recognising it as a vital shield protecting our businesses and economy.”

McEwan emphasises that the fight against money laundering is not just the responsibility of law enforcement or financial institutions, but a collective effort that requires every business to play its part by staying informed, implementing strong KYC practices and fostering a culture of vigilance.

“Remember, money laundering is not just a financial crime, but the lifeblood of broader criminal activities that tear at the fabric of our society. By cutting off this flow, we are not just protecting our businesses, we are striking a blow against the very heart of organised crime in South Africa.”